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Moral Hazard and Bargaining Power

Dominique Demougin () and Carsten Helm ()

German Economic Review, 2006, vol. 7, issue 4, 463-470

Abstract: Abstract. We introduce bargaining power in a moral hazard framework where parties are risk‐neutral and the agent is financially constrained. We show that the same contract emerges if the concept of bargaining power is analyzed in either of the following three frameworks: in a standard principal–agent (P–A) framework by varying the agent's outside opportunity, in an alternating offer game, and in a generalized Nash‐bargaining game. However, for sufficiently low levels of the agent's bargaining power, increasing it marginally does affect the equilibrium in the Nash‐bargaining game, but not in the P–A model and in the alternating offer game.

Date: 2006
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German Economic Review is currently edited by Bernhard Felderer, Joseph F. Francois, Ivo Welch, Urs Schweizer and David E. Wildasin

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